Thursday, November 20, 2008

Were you lucky enough to own the S&P 500 index at the beginning of the year then you would only be down 47%.

The problem with this headline is that for many people they are off more than 47% on a year to date basis. Today we broke the previous low put in by the Dow Jones. We had successfully tested the previous low several times, but today we closed at a low equal to October 2002 of 7,550.

The S&P 500 faired even worse closing at an 11 year low. The question should be the old Limbo dance question, “How low can you go?” I don’t know. I do know that things seem to be at their worst. They are not as bad as they were in early October, but for a different reason. In October we were concerned, no scared to death, that the world banking system was about to fail.

The world’s central banks spent trillions of dollars shoring up the commercial banks balance sheets so they could begin lending money. While the central bank wanted the commercial banks to lend and they gave them trillions to do so those banks haven’t started lending, at least not yet.

The credit markets are still showing signs of the demand for US Government Securities regardless of maturity. Today the yield on the 10-year T bond fell to 3.01% yet the 30-year mortgage still stands at 6.05%, more than double the yield on the 10-year T-Bonds.

If you wanted to buy and if you could get them, a 90-day T-bill today would earn .02% yield. I had a client call today asking me if I thought it was a good idea to take out of his unused home equity line and put it in the bank?

I said take the money before the bank pulls the home equity line out from under him. He can borrow money at prime minus ¼ of 1 percent and deduct the interest. In his tax bracket he’ll borrow the money at about 2.4% after tax, this is perhaps the cheapest cost of money he will ever see in his lifetime I think the Fed will cut interest rates another 50 basis points in December if not before. This cut by the Fed will reduce the prime rate to 3.5% and will take his home equity interest rate to just about 2% after taxes. This is the second client in the past week who has called with the same question about a home equity loan.

Will all of these low interest rates and strong dollar make the equity markets more appealing? Over time I think they will. I do see exceptional value in the market. I waited and waited on GE and bought it between $15 and $16 only to see it fall to $13. How smart am I? But one client sent me a note that said he thinks for the long-term GE was a great buy. I hope he is right.

As I sit here to write this blog I ask my self these questions? Have I limited my client’s risk and more importantly how secure is their income? The answer is a resounding yes; they will get their checks and for now I don’t have to sell anything for them to get the income they need. As much as I would like to think I could control the markets I’m just along for the ride.

When we have days like these I spend a great deal of time thinking about you, my clients. We own the same things and as one president once said “I feel your pain.” I don’t like it, but I have to deal with it for you and me alike.

Dan Perkins

Saturday, November 15, 2008

Should GM, Ford and Chrysler and in turn America be allowed to fail?



There is a part of me that cannot believe that people would even consider the possibility of letting the “Big Three” auto makers go into bankruptcy. In the employment report of last week we saw the number of continuing claims just under 4 million people. This is a bad number and most people project that the number of people unemployed will go much higher before it begins to fall. If we allow the "Big Three" to fail then the unemployed numbers could double or even more and I do not want to even think about impact on the markets and your accounts.

If we allow the "Big Three" to fail how many people, will be added to the unemployment roles? Depending upon whom you talk to for every assembly line worker there can be as many as 10 to 20 additional people providing goods and services to the auto industry. The impact on the lost jobs could be terrifying. The most recent number of employees, retirees and family members covered by GM was about 500,000 people. Take that number and use the low end of 10 times and you are looking at over 5 million at GM alone, or more than double the current unemployed.

What would be the additional impact on the economy if labor contracts, health and welfare benefits, and pension payments could no longer be made? I am reminded a quote from Wayne Angel, the former member of the Federal Reserve who said, ‘The failure of Lehman Brother was a terrible mistake and the Treasury should own up and not make that mistake again.”

Letting the "Big Three" go into bankruptcy should not be on the table for many reason. We can discuss the failure to change the product mix, but the product mix can be part of the funding to protect our economy for total collapse. While we are on the subject of product mix, what happened to the need to develop alternative energy sources? When the price of gasoline was $4.25 per gallon, everybody was screaming about alternative energy. Now that it is $2, nobody wants to talk about alternative energy.

The president elect talked about drilling to expand our resources for energy and now he is talking about overturning all of the Executive Orders, including the lifting of the ban on off shore drilling. We have not had an energy policy and it appears that with gas at $2 or less we still will not have a policy.

We chastise the auto companies for not building more fuel-efficient cars and the energy companies for not developing alternative fuel for autos, but at the same time, we will do nothing about the fact that even at these low prices we are still sending over $300 billion overseas to some countries that do not like us very much. It is difficult for me to understand how we can consider letting the biggest employer in the United State fail while at the same time we cannot come up with an energy policy that could create hundreds of thousands of new jobs and help Detroit develop better cars.

Dan Perkins

Tuesday, November 4, 2008

A Tale of Two Cities


As you can see from the chart above the market (Dow Jones) has made a significant advance off it's most recent low. Markets do not go down forever although I was not sure about that during the first half of October. Similarly they do not go up forever either. The stock market action during the month of October was like the Dickens novel, “A Tale of Two Cities”.

The first two weeks were sheer terror when compared to the second two weeks which felt like heaven. We went from an inter day low of about 7,880 on the Dow Jones to a recent high of about 9,650. The almost 1800 points move was about 22% off the bottom with no real correction.

As much as all of us like the feeling of an up market, we must deal with the reality that we have serious problems that need to be addressed. This Friday we have the unemployment data at 8:30 in may be more in the 225,000 to 275,000 range which will signal that the economy in is even worse shape than people suspected.

If I am close to the number, I would expect to see the market sell off because the prospects for recovery will be pushed out further into 2009. There will be more talk about an additional stimulus package to try to get the economy going. I would also expect the bond market to rally because of the feeling that the Fed will have to spend another 50 basis points in interest rates by cutting sooner rather than later.

For those of you that are my clients I am putting on a small position of insurance called the Pro Shares Ultra Short S&P 500 Exchanged Traded Fund (ETF). The objective is to offer some downside protection if the market does correct as I expect. If I am right this investment will go up in value twice as fast as the market goes down. You can get more information on Pro Shares ETF at http://www.proshares.com.

I expect that the markets will continue to be volatile and the use of ETF’s will have the potential to add some stability to our investments. These ETF’s are not long-term investments; they are a way to protect some portfolios over the short-term. We have the flexibility to protect on the downside and increase our return on the upside.

I expect that some of you may be asking yourself why don’t we use the ETF’s all the time? This is an excellent question and my answer is that ETF's have extreme volatility and too much exposure could make you sick as being on a roller coaster ride. We want to own high quality investments and now we want own some insurance to reduce overall volatility.

Dan Perkins